The Commercial Short Sale and the Real Capital Gain

Many investors will be uneasy to realize that buildings and other structures on property will only depreciate with time. Much like the investment of a brand new motor vehicle, as soon as the new product is ready for consumption its value immediately plummets. Indeed, with commercial property its mere exposure to the elements will be enough to precipitate the demise in value.

Rather, it is land and the opportunity to occupy premises that increase in value. The two of these, quite independently of the value of a structure, will display a mutuality that will see one complement the other. The more sought after the occupations of commercial premises are, the greater the value of the land upon which they stand.

Indeed, the fact that structures depreciate steadily by definition, requires that the actual capital gain attributed to land or occupation value be of a substantially greater amount than is at first noticeable. While property is supposed to appreciate on average, at levels outperforming the stock market, the devaluation of a dwelling shrouds the real value of developed commercial property. When property appreciates by 12%, this occurs in the face of structural depreciation of at least 4% of the total value of the land on which it is erected.

In all cases, except for the acquisition of an unfinished project, the purchaser of commercial property will experience a depreciation of structures on the property. To counter this inevitability, resources will need to be invested in maintenance of the structure or in promotion of the location for commercial enterprise. When this is accomplished a greater return is derive from both tenancy and resale.

While the unfinished project may be yet unsuitable for commercial use, if the project is completed after purchase, the new owner commences commercial release attracting either the maximum price at resale, or the maximum return on commercial tenancy. The sad retraction of commercial property into that requiring repair and maintenance is avoided; the difficulty in marketing such appeal is eliminated.

Similarly, the short sale of distressed commercial property at foreclosure will provide a buffer of advantage, due to the circumstances of the sale being what is effectively a mortgagee in possession sale. This type of theoretical edge will synthetically enable commercial release attracting either the maximum price at resale, or the maximum return on commercial tenancy, by relative comparison to the unfinished property investment. The similarity with an unfinished project is patent.

Particularly since the unfinished project requires an additional capital investment, the short sale will not necessarily carry this burden with it. When the return on investment is calculated when realizing a profit, the hypothetical securitization of such an investment would find a higher return for the short sale strategy due to its lower price. Conversely, the higher price of the unfinished project will clearly offer investors a lower return.

The short sale is clearly placing a potential investor at a financial advantage however, in order for this strategy to be allowed a full ambit of operation, the accurate valuation of material is needed to depreciate commercial structures on the property. This will allow for the correct drawing of comparisons. From there, a breakeven point can be identified in order to estimate the practical viability of the exercise.

Certainly, the securing of attractive tenancy returns on the property will enhance profitability and is also able to favor the prospect without respect to the structural value.

Posted by Arnold Balthazaar on Jun 28 2010. Filed under Economic Updates. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry